Insurers and self-insurers have several tools to manage the costs associated with the health care needs of their members. Most commonly, health care plans lease access to a preferred provider organization (PPO), which is a health care organization that owns contracts for discounts with physicians, hospitals, and other medical providers which provide health care services for a reduced fee to eligible health plan members.
The following features are typically present in many PPO subscription agreements and must be met for members to be eligible for the contractual discounts:
Steerage—a mechanism which encourages members to seek medical treatment from participating medical providers. Steerage is typically influenced by medical providers by a specific PPO logo printed on the member's insurance card.
Financial Incentive/Benefit Differential—incentives in place to encourage members to seek medical treatment from medical providers participating in the PPO. Typically these incentives are found in the form of benefit differentials between In-Network and Out-of-Network benefits. For example, if a member is treated by an In-Network medical provider, their claims may be considered and paid at a benefit level of 80/20. The “80” is the percentage of the allowed charges that the health plan will pay and the “20” is the percentage of the allowed charges that the patient will be responsible for. If a member is treated by an Out-of-Network medical provider, their claims may be considered and paid at a benefit level of 60/40. The “60” is the percentage of the allowed charges that the health plan will pay and the “40” is the percentage of the allowed charges that the patient will be responsible for.
Payment Timeframe—Typically, PPO agreements call for claims to be processed and paid within 30 days from health plan receipt.
Health plan members typically have the freedom to choose to receive health care treatment from medical providers participating in the PPO (In-Network) or by providers not participating in the PPO (Out-of-Network).
When health plan members make the decision to seek treatment from an Out-of-Network provider, health plans are billed at rates which are often set artificially high. With no contractual discount agreement present, health plans often pay substantially more for the health care of their members and also shift responsibility for the portion of charges not covered by the health plan to the member. This practice, along with higher participation in the cost of out of network care, penalizes the member financially for going to an Out-of-Network provider. Members are responsible to participate in the expense of Out-of-Network health care at higher co-insurance levels, as well as any portion not covered by the health plan, e.g., usual, customary, and reasonable (UCR) reductions. The following example illustrates these financial penalties to the health plan member.
Member A has a routine tonsillectomy performed. This example assumes that the patient is an adult seeking treatment in New York City, and there are no complications during the procedure.
In-Network Example
Billed Charge$7,000.00UCR Reduction0.00PPO Contracted Rate1,542.00Savings5,458.00Patient Deductible100.00Patient Co-Insurance (20%)288.40Health Plan Payment (80%)1,153.60Total Due from Patient388.40
Out-of-Network Example
Billed Charge$7,000.00UCR Reduction3,800.00Allowed Amount3,200.00Savings0.00Patient Deductible100.00Patient Co-Insurance (40%)1,240.00Health Plan Payment (60%)1,860.00Total Due from Patient5,140.00
Regardless of penalty, patients often elect to receive treatment from an Out-of-Network provider. Health plans have aggressively pursued cost management solutions that reduce billed charges and shelter members from balance billing as illustrated in the above example.